The New New Economy

Don't look now, but E-commerce -- and E-commerce companies -- are staging a comeback.
John EdwardsJanuary 7, 2004

Except for Xerox and FedEx, few corporate names ever make it into the lexicon of action verbs. The latest entry, however, appears to be search-engine specialist Google, which is now invoked routinely by users of the Internet (“How did you find me?” “I just Googled your name.”).

While Google’s migration into the realm of public usage may be surprising, it’s not nearly as surprising as its migration into the realm of public markets. Google management is expected to take the company public in a deal that could be valued as high as $20 billion.

The underwriting would be the surest signal yet that the retreat from all things Net may finally be over. Of late, commercials for online businesses—not seen for the past two years—have started popping up on television once again.

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Such profile-raising is big news in the virtual world. Even bigger news: the recent run-up in the share prices of many dot-coms. During the first three quarters of 2003, the stock price of Ebay Inc., the E-commerce standard-bearer, jumped from $34 to just over $54 (the company also launched a two-for-one stock split). Likewise, the share price of book-and-movie giant more than doubled during that same period.

Those spikes—plus the emergence of such lesser-known but thriving dot-coms as RedEnvelope and prototyper—could have finance executives revisiting their dot-com strategies. Odd as it may sound, investing in Internet projects may make sense again. Same thing for mimicking successful E-business models. Wal-Mart Stores Inc., for example, is gearing up to compete with Internet movie darling Netflix Inc.

Talk of acquiring an Internet company is no longer grounds for institutionalization, either. Consider InterActive-Corp, the New York­based owner of TV shopping channel HSN. The company, which is run by former Vivendi Universal boss Barry Diller, has gone on an E-acquisition frenzy during the past six months, purchasing Expedia, Hotwire .com, and, among others.

Contrarian plays? Perhaps. But E-commerce veterans say consumers and business customers have finally grown accustomed to electronic commerce. A recent survey, for instance, showed that electronic bill presentation and payment (EBPP) has finally made its way into the mainstream: 57 percent of respondents said they pay at least one bill electronically. In 2000 that number was more like 17 percent. “The connectivity the Internet provides to businesses is still a huge benefit,” says Mark Jensen, national director of venture-capital services at Deloitte Touche Tohmatsu in New York. “It’s as true today as it was in 2000. The Internet does change everything.”

Big Pipes

So does money. And unlike the Twistie.coms and AgletEmporium.nets of the late 1990s, the survivors of the dot-com shakeout are generating real revenues.

Take LendingTree Inc., a dot-com that has reaped the benefits of the recent mortgage-refinancing boom. In 2002, the online loan and real-estate exchange racked up sales of $111 million, a net income of $9 million (compared with a $29.3 million net loss in 2001), and sales growth of 74.01 percent. Those numbers spurred the interest of InterActiveCorp, which bought LendingTree in August in a stock deal valued at about $730 million.

Keith Hall, senior vice president and CFO of Charlotte, N.C.-based Lending- Tree, believes the company has played a big part in bridging the gap between Internet start-up and established financial-services provider. “We’ve noticed a pretty steady overall growth and acceptance of online demand from consumers as well as from our business partners,” he says.

Ironically, the earlier New Economy collapse helped Lending Tree consolidate and stabilize its market segment. During that period, says Hall, the online broker also honed its business model.

Another similarity: like early power producers, E-tailers are benefiting from a much-improved delivery system. The rapid rollout of broadband networks has enabled customer relationship management (CRM) specialist Salesnet to serve up its hosted products with greater speed and efficiency. The technology has also allowed the company, which went to market in 2000, to target small businesses, many of which have only recently swapped their dial-up modems for broadband links. Maurice Matteodo, Salesnet’s vice president of finance and CFO, says the company has succeeded by providing a tangible CRM service: “There’s a real product that provides its customers with real results, including significant improvements in sales effectiveness.”

The growing availability of broadband access is also breathing new life into EBPP. Online bill-payment services are now available from a host of providers, such as Yahoo and Microsoft’s MSN. Land-based retailers have gotten into the act as well. Harley-Davidson Financial Services Inc., for one, has done well with its EPAY system, which was launched in 2000. Notes Deloitte’s Jensen: “The [EBPP] market has continued to grow, both from a commercial and a consumer perspective.”

Much of that growth can be attributed to PayPal, the Ebay payment system that has helped convince skeptics of the merits of online payment. The service, founded in 1998, now has more than 35 million users in 38 countries.

Many of these converts, mostly consumers and small businesses, use the service to make payments for products acquired outside of auctions. The company’s management announced last July that “the opportunity for PayPal is very large” and may one day rival Ebay’s primary auction business.

First Movers, Second Wave

Success stories like PayPal could fuel renewed corporate interest in E-commerce investments. Venture-capital backing for E-commerce initiatives, however, has yet to approach its once-lofty heights. It may never. At the zenith of the dot-com bubble (the first quarter of 2000), venture capitalists poured nearly $23 billion into Internet companies. By contrast, venture-capital investment in E-commerce companies in the first quarter of 2003 didn’t even reach $2 billion. “The VC market needs to show that exit scenarios are achievable, [and needs] more success to build confidence, before it will invest again with robustness,” says attorney Mallenbaum.

Still, Nick Vidnovic, private-equity group manager at Pittsburgh-based Mellon Financial Corp.’s Private Wealth Management Group, sees light at the end of this very long tunnel. “In general, we’re seeing a lot more new companies being formed than a couple of years ago,” he explains. The founders of those companies are no doubt buoyed by the recent successes of such Web upstarts as Netflix. The Los Gatos, Calif.-based company offers mail-order DVD rentals via a Web interface. Subscribers can rent an unlimited number of titles each month for a flat fee of $20. They then ship the DVDs back, free of charge.

Movie buffs have flocked to Netflix, and the company’s share price has climbed from around $11 to more than $33 in the past nine months. The E-tailer’s success has placed it in direct competition with Wal-Mart and Blockbuster Inc., however, as both have begun to develop in-store versions of Netflix’s flat-fee subscription strategy.

That’s strikingly reminiscent of the scenario that ultimately doomed many of the first movers of the old New Economy (think Etoys). But Netflix CFO Barry McCarthy is confident that by offering titles shunned by its family-friendly competitors, plus providing free home delivery, Netflix can beat back its powerful rivals. “Just as Ebay and Amazon pioneered a new frontier and dominated their categories, we do, too,” he claims.

Maybe. Certainly, there’s growing evidence that E-commerce is on the cusp of a new era, one of innovation tempered by experience and rational expectations. “There is no question that what was in place two or three years ago was flawed,” says Vidnovic. “But there were also a number of ideas that were pretty darn good.”

Jensen concurs: he believes that E-commerce’s worst days are finally over. “It was awful,” he recalls. “It’s not awful anymore.”